Mutual Funds are the flavor of the season. Everybody wants to invest in them. Why not invest in mutual funds in your minor child’s name? You can start with just Rs 500 a month via SIPs. Systematic Investment Plans popularly called SIPs, allow you invest small sums of money regularly, say once each day, month or fortnight in a mutual fund scheme.
Many parents in India invest gift money in fixed deposits for children. Why not in mutual funds? There’s good news. You can invest in any mutual fund scheme of any mutual fund house in the name of minor child.
Your minor child is the first and sole holder in the mutual fund folio. No joint holder is allowed in this folio. The guardian is either court appointed legal guardian or a parent.
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Anyone under the age of 18 years can invest in mutual funds. They must do so with the help of parents or a guardian. The minor child is the sole account holder and is represented by a parent. Set an investment goal for your minor child like children’s education and marriage.
Once your child becomes a major (Turns 18 years of age), the first thing you a parent must do is, change the status of the sole account holder from minor to major. If you don’t do this, all transactions in this account are halted.
SEE ALSO: Mutual Fund Units
PAN of the guardian.
The guardian will have to comply with KYC formalities.
When a minor child becomes a major, all transactions are suspended. (This means standing instructions on SIPs, SWPs and STPs stop immediately). The mutual fund folio is frozen for operations by the guardian, when the minor attains maturity.
Before the minor child attains maturity, the AMC sends a notice to the mutual fund unit holder. This notice is sent to the registered correspondence address advising you (minor) to submit the application form along with the prescribed documents showing change of status in the folio from ‘minor’ to ‘major’.
You will also have to submit KYC Acknowledgment Letter of you (unit holder) becoming a major.
There’s no income tax on transfer of money from a parent to a child and vice versa. There’s also no gift tax. The income earned from your child’s mutual fund investment is clubbed with yours (parents) income for income tax purposes. You (parent) will have to pay tax on this income.
If both parents are working, the income from minor child’s mutual fund investment is clubbed with that of the parent earning higher income.
A number of mutual fund houses are offering child plans and children gift plans. These children gift plans have a lock-in of 5 years or till the child attains maturity. Don’t fall for these marketing gimmicks. Invest in mutual funds which are high performers rather than child gift plans. You would earn much higher returns.
You could invest in small-cap and mid-cap funds with a time horizon of 5 years or more. These are equity mutual funds which invest in small-cap and mid-cap stocks.
What if your child’s education fees have to be paid in less than 5 years? If this holds true, then small-cap and mid-cap funds are not a good idea. You would be better off investing in short duration funds. These funds invest in relatively safe debt securities with a short maturity period of 1 to 3 years.
Make lump sum withdrawals from short duration funds. You can even set up SWPs (Systematic Withdrawal Plans) if redemption is within 3 years. Redemptions within 3 years are taxed as short term capital gains. These gains are added to taxable income and taxed as per tax bracket. Redemptions after 3 years are called long term capital gains and taxed at 20% with indexation benefit to reduce tax liability.
SEE ALSO: Money Market Mutual Fund
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